On November 1, 2014, Olympic Company adopted a stock-option plan that granted op

Question

On November 1, 2014, Olympic Company adopted a stock-option plan that granted options to key executives to purchase 66,500 shares of the company’s $10 par value common stock. The options were granted on January 2, 2015, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at $40, and the fair value option-pricing model determines the total compensation expense to be $862,500.

All of the options were exercised during the year 2017: 49,875 on January 3 when the market price was $67, and 16,625 on May 1 when the market price was $78 a share.

Prepare journal entries relating to the stock-option plan for the years 2015, 2016, and 2017. Assume that the employee performs services equally in 2015 and 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date

Account Titles and Explanation

Debit

Credit

1/2/15

12/31/15

12/31/16

1/3/17

5/1/17

Date

Account Titles and Explanation

Debit

Credit

1/2/15

12/31/15

12/31/16

1/3/17

5/1/17

Explanation / Answer

Olympic Company

Journal Entries

Working notes

Employee stock option expenses for 2015 = $862500/2 = $431250

Employee stock option expenses for 2016 = $431250

Date Particulars Debit Credit 1/2/2015 -No Entry- 12/31/2015 Employee's compensation expense A/c Dr. $431250 To Employee Stock Option A/c $431250 (Being employees compensation expenses recognised) Profit and loss A/c Dr. $431250 To Employee compenasation Exp. A/c $431250 (Being option expense transferred to P&L A/c) 12/31/2016 Employee's compensation expenses A/c Dr. $431250 To Employee Stock option A/c $431250 ( Being employee cmpensation expenses recognised) Profit and loss A/c Dr. $431250 To Employee compensation expense A/c $431250 (Being employee expenses transfered to P&L) 1/3/2017 Bank A/c Dr. $1995000 To Employee stock option A/c $1995000 ( Being option excercised ) Employee Stock option excercised A/c Dr. $2641875 To Equity share capital A/c $498750 To Securities premium $2143125 (Being shares alloted) 5/1/2017 Bank A/c Dr. $665000 To employee stock option A/c $665000 (Being option exercised Employee stock option A/c Dr. $880625 To Equity share capital A/c $166250 To Securities premium A/c $714375 (Being shares alloted)

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